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OIG Proposes to Define “Charges” and “Substantially in Excess”

September 23, 2003

In Depth

On September 15, 2003, the Office of the Inspector General (OIG)of the U.S. Department of Health and Human Services published a notice of proposed rulemaking. The rulemaking would, for the first time, define in regulation the key terms that govern the authority of the OIG to exclude from participation in most government health care programs those individuals or entities that submit bills for services that reflect charges “substantially in excess” of the individual’s or entity’s “usual charges.”

Put simply, the OIG believes that providers must “charge Medicare and Medicaid approximately the same amount as they usually charge their other purchasers . . . or risk exclusion from all Federal health care programs.” While the OIG concedes that providers are not required to give Medicare and Medicaid their “best price,” providers that “charge Medicare or Medicaid substantially more than they regularly charge a majority of their other customers” are at risk of exclusion.

The new definitions and methodologies in the proposed regulation raise serious issues for health care providers that have established their charging practices based upon the plain language of the statute. Comments on the proposed rule are due on or before November 14, 2003.

ChargesWith the exception of a short period of federal price controls, and except for providers subject to state-run price control systems, health care providers have generally been free to set their own charges. However, few consumers actually pay these charges. Government programs, private third-party insurers and many employers have routinely imposed or negotiated substantial discounts from providers’ charges for their patients. Although charges play a role in determining payments under some cost-based reimbursement and fee-schedule payment systems, most programs and insurers now pay for items and services on the basis of prospectively set rates and schedules that are not driven by charges. A provider’s “usual” charges also serve, in most cases, as an upper limit of payors’ obligations.

Permissive ExclusionSection 1128(b)(6)(A) of the Social Security Act authorizes the Secretary of the U.S. Department of Health and Human Services to exclude from participation in any Federal health care program 1 (Medicare, Medicaid and several other important programs that are important sources of provider revenue) any individual or entity that submits to Medicare or certain other health care programs, a bill for items or services that reflects charges (or claimed costs, in certain cost-based payment systems) “substantially in excess” of that individual’s or entity’s “usual charges” (or costs, as applicable) for such items or services, unless the Secretary finds there is good cause for such bills or requests containing such charges or costs.

The Secretary delegated this permissive exclusion authority to the OIG in 1988, and the initial implementing regulations published by the OIG simply paraphrased the statutory language without defining the key terms “substantially in excess” or “usual charge.” Although the 1990 proposal invited public comment regarding appropriate definitions, the OIG reported in the final rule that no feasible definitions had been proposed, and it would continue evaluating billing practices on a case-by-case basis. In 1997, the OIG proposed that it define the terms through rulemaking (September 8, 1997), but in 1999, again backed away from the task, citing the increased role of fee schedules as limiting the application of this particular exclusion authority.

Current Proposal

RationaleThe OIG explains that it has decided to renew its efforts to define the key terms in this exclusion authority because a provider’s “actual charge” is an upper limit on the amount that the Medicare program will pay, because charges and costs play a role in the determination of Medicare outlier payments and because the OIG believes that even government fee schedule payments “may be substantially more than the payments that providers have agreed to accept from most or all of their third party payors.” The OIG concedes that the “principal protection against overpaying for services to [f]ederal health care program beneficiaries is timely and accurate updating of fee schedules,” but believes that its exclusion authority is a “useful backstop protection for the public fisc.”

Definition of Usual ChargeThe OIG proposes to define “usual charge” to include the following:

Amounts billed to patients covered by indemnity insurers not under contract with the provider; and

Any fee-for-service rates a provider has agreed to accept from any payor (including Tri-Care), including any discounted fee-for-service rates negotiated with managed care plans.

“Hybrid” rates that include bonus or withhold provisions that could affect up to and including 10 percent of total potential payment are to be included at base rate plus or minus one-half the incentive amount, regardless of whether the incentive bonus was earned or withholdings incurred.

Under the proposed rule, providers would have to include in the calculation of “usual charge” “all charges of any affiliated entities providing substantially the same items or services in substantially the same markets.” An affiliated entity is one that directly or indirectly is under common ownership or control through one or more intermediaries.

The OIG proposes to exclude from the calculation of a provider’s “usual charge”
the following:

“Hybrid” fee-for-service rates where more than 10 percent of maximum payment amount may be paid as a bonus or subject to withhold (Tri-Care payments are also subject to this provision);

Fees set by Medicare, the state health programs and other Federal health care programs, with certain exceptions.

The OIG has proposed two different alternative approaches to determining a provider’s usual charge: the provider’s average charge across one year or the provider’s median charge during one year.

Definition of “Substantially in Excess”The OIG proposes that charges 2 120 percent greater than a provider’s “usual charge” will be deemed to be “substantially in excess” and subject the provider to exclusion action. Charges to Medicare for physician services covered by the Medicare fee schedule, regardless of the amount, will not be deemed “substantially in excess” of usual charges because the fee schedule operates as a cap. For purposes of the “substantially in excess” analysis, provider charges will be compared to the Medicare payment amount and not the charge reflected on the Medicare claim.

Exclusion of “Physician Services”The proposed regulation excludes from its scope claims for “physician services” reimbursed under the Medicare physician fee schedule, which the OIG considers “functionally equivalent to a prospective payment methodology.” With respect to physician services, provider charges to other payors that are “substantially” below physician fee schedule amounts will not be found to violate the regulation as proposed. At the same time, the OIG is soliciting comments as to whether any of the other services reimbursed through the physician fee schedule should be subject to the regulation. Under the proposed rule, ancillary services furnished by physicians, such as laboratory tests and drugs, would remain subject to the regulation.

The OIG considers it impossible to develop a uniform rule applicable to Medicaid physician services but believes it unlikely that Medicaid program payments, which historically have been low, would exceed providers’ usual charges.

Exception for “Good Cause”The statute provides that the Secretary may impose the excess charges exclusion “unless the Secretary finds there is good cause for such bills or requests containing such charges or costs.” In the original implementing regulation, the OIG set forth the standard against which it would evaluate “good cause”: “[W]hen such charges or costs are due to unusual circumstances or medical complications requiring additional time, effort, expense or other good cause.” In the proposed rule, the OIG states that “good cause” should be defined broadly and proposes for comment the addition of “increased costs associated with serving program beneficiaries” as another basis constituting “good cause.” The OIG proposal places the burden of establishing “good cause” on the provider and also asserts without supporting discussion or citation that its decisions regarding “good cause” are not subject to administrative or judicial review, despite the statutory provision of such review for exclusion decisions. The OIG also recognizes that because its exclusion authority is to be exercised only for remedial purposes, program exclusion in connection with isolated or unintentional charging mistakes would be inappropriate.

Advisory Opinions
The OIG proposal would permit a provider to submit a request for a formal advisory opinion in conformity with 42 C.F.R. Part 1008 with respect to specific billing arrangements that the provider has or plans to undertake.

Problems for Providers: Areas for Comment on the Proposed Rule
The fundamental purpose of the OIG’s proposal is to put providers on notice regarding the acts that would subject them to the severe penalty of program exclusion if the proposed regulations are adopted. Unfortunately, the proposed regulation would create an overly complex and unwieldy methodology for analyzing a provider’s charges.

The proposed methodology is not only difficult to implement, it is also inconsistent with the plain language of the statute. The proposed exclusion of Medicare and Medicaid charges from the “usual charge” analysis (even if counted only at the fee schedule payment levels) adversely affects “substantially in excess” determinations under either an average charge or a median charge methodology. Unlike the proposed regulation, the statute does not provide for exclusion based on charges to government programs in excess of the provider’s “usual charge to other than Medicare and Medicaid patients.” The statutory prohibition is against charging Medicare substantially in excess of a provider’s “usual charges”—without further limitation, thus presumably to all patients, including Medicare and Medicaid patients.

At a more fundamental level, the proposal to exclude certain fee schedule payments from the definition of usual charges reflects confusion regarding the fundamental distinction between charges and payments in the reimbursement schemes established by the Medicare program. Fee schedule payments are not charges in the first place; they are what the payor, in this case Medicare, has elected to pay. The proposed rule fails to recognize this fundamental difference between a provider’s charge and the amount a payor ultimately agrees to pay.

Providers should be aware that the alternative methodologies proposed (“average” charge vs. “median” charge) may produce dramatically different results on a provider-by- provider basis. Accordingly, to evaluate the impact on their charging practices of the “substantially in excess” analyses proposed by the OIG, providers may wish to model their charges under each of the proposed methodologies. Providers should consider the impact of the proposal to include charges of all affiliated entities, which for some organizations could require the aggregation of charges of numerous entities, in the “substantially in excess” analysis for each provider.

Providers should also be aware of the potential interpretive traps created by the proposed rule (e.g., whether or which providers are considered related and whether or which providers are considered to provide substantially the same services or to be located in substantially the same markets) and the risk inherent in reaching the wrong conclusions regarding the ambiguous standards the OIG is proposing program exclusion.

In addition, the OIG has specifically requested public comment regarding the methodologies overall: the 10 percent bonus/withhold threshold; the 120 percent substantiality threshold; the inclusion or exclusion of other services governed by the Medicare fee schedule and the standards for “good cause” exception.

Please contact your usual McDermott, Will & Emery lawyer or any of the lawyers listed above if you have questions about the proposed rule or the underlying statutory provisions. We can also assist you with the preparation of comments regarding the proposed rule. Comments are due November 14, 2003.

1 "Federal health care program” means any plan or program providing health care benefits, whether directly through insurance or otherwise, that is funded directly, in whole or part, by the United States Government (other than the Federal Employees Health Benefits Program), or any “State health care program,” which is defined as Medicaid (Title XIX of the Social Security Act), the Maternal and Child Health Services Block Grant program (Title V), or Block Grants to States for Social Services (Title XX). 42 C.F.R. § 1001.2.

2 The OIG proposed definition also refers to provider “costs” that are substantially in excess of usual “costs,” but does not explain this concept further.